Brokers feel the bottomline pinch

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MUMBAI: Steadily, shrinking turnover on the bourses is taking its toll on the bottomline of leading broking houses, as can be seen from the latest quarterly numbers for the sector. And if market watchers are to be believed, the situation is unlikely to improve anytime soon. Compared with the April-June quarter, bottomlines of many leading broking houses have nearly halved even though the topline has seen only a marginal decline.

JM Financial, Emkay and Centrum are among the broking firms that have seen a steep decline in their net profits on a sequential basis. Others like Edelweiss Capital, Geojit Financial and India Infoline have witnessed a decline of net profit around 32%, 36% and 18%, respectively, during the same period. The net profit is derived after deducting income from other sources.

The results paint a bleak picture for broking firms. Most of the listed broking firms have reported either a fall in net profit or at best only a marginal rise in their bottomline for the period.

Rising interest cost is pushing up operational costs for most broking outfits even as they are simultaneously faced with declining revenues. Having suffered massive losses during the early part of this year, most retail investors are now reluctant to return.

Till last year, broking firms had been on a reckless expansion spree, adding branches and manpower across cities. The move was partly driven by the lure of high valuations, as overseas players were keen to buy stakes in domestic broking outfits. With turnover having dropped sharply, outfits are now struggling to sustain their branch networks, some of which were not profitable to begin with.

The plight of the smaller broking companies is even worse, as they are struggling to meet their margin obligations due to liquidity constraints. In October, trading terminals of 95 broker-members were deactivated in the futures and options segment and 29 deactivations occurred in the cash segment. In September, the terminals of 36 broker members were deactivated whereas in August it was only 11. There were 885 active trading members in the F&O segment and 984 in the cash segment on NSE in October.

Brokers say they are more cautious about their expenditure and cutting costs to save their profits from being further eroded. Expansion plans too are, therefore, facing hurdles, as broking companies are not finding any takers for franchisees. In some cases, they are restructuring business and combining two branches that are close by.

Most of them are either reducing employee strength or salaries, or, in some cases, both. Market watchers say the scenario is quite grim across securities firms, be it domestic or foreign. The industry may continue to witness a 10% reduction in workforce over two quarters if things do not improve from hereon, they say.

These woes are reflecting in the stock prices of broking firms. Most of them have fallen more than 75% from their highs early this year. After banking stocks, broking outfits are the next best proxy on the economy. If the macro picture is rosy, invariably stock markets do well. At the same time, a downtrend in the economy is quickly reflected in the stock market. The stock price of Edelweiss Capital has fallen from its peak of nearly Rs 1,800 to Rs 298 now. Shares of Prime Securities are currently available at Rs 18, nearly one twentieth of their peak a few months ago.